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If you aren’t actually in your country of citizenship, do you need to pay taxes in that country? Is it really necessary? Will anyone ever know if you don’t?

The short answer is—Maybe. It depends on where you are from, where your employer is from and how long you are traveling.

This article doesn’t discuss whether you need to pay taxes where you are currently living or traveling to. I’m only discussing if you need to pay taxes your country of citizenship if you are not actually residing there.

I’ve provided links to my sources for each country. I recommend that you investigate further based on your situation. Most countries have very specific rules, and limitations change frequently.

Canadian Citizens

Even if you are not present in Canada, if you maintain any ties to Canada you become a “factual resident”. That means you are required to pay income taxes on any worldwide income you receive. If you have a home, a spouse, any personal property, bank accounts or health insurance in Canada you will likely be considered a factual resident. Sorry guys.

If you pay tax in a foreign country, you can usually deduct that amount. There are lots of tax treaties in place to help you avoid paying taxes in two countries at once. But there is no standard overseas tax credit unless you happen to be digging for oil or involved in an engineering or agricultural activity.

UK Citizens

If you live outside the UK for more than 183 days in the year, you can become a non-resident, but you must still pay tax on any income originating from the UK. So if your boss is in the UK, you owe tax.

Like Canada, the UK has plenty of treaties in place to avoid making you pay tax in two countries. But that means you still have to pay tax in at least one of them.

US Citizens

The bottom line for digital nomads is: If you are outside the US for 330 days of the year, you do NOT have to pay INCOME taxes on any WAGES you earn while you are away.

First, no matter where you live, if you earn money you still have to file your taxes. You might not owe any tax, but the government still wants to know where your money came from.

When you file your annual taxes, you need to submit the papers for a “foreign earned income inclusion” which is a fancy phrase for a tax credit. (Form 2555 for the uber tax savvy).

You qualify for this exclusion if:

You meet the Tax home test: This test simply requires that your principal place of business, employment or residence is located outside the US. If you don’t have a residence (i.e. you’re livin’ in a tent) you can use the location where you do most of your business. If that means your place of business is in 330 different campgrounds around South America, that’s fine.

AND

You also meet one of these two tests:

1. Bona fide residence test: You only meet this test if you are a resident of another foreign country for the ENTIRE tax year. You also must intend to stay overseas for an “extended, indefinite stay”. Most digital nomads don’t stay long enough to pass this test.

OR

2. Physical Presence test: You must be outside the US for 330 days of any consecutive 12 month period. Assuming you spend less than 30 days at home, you’ll meet this test.

Income Tax and Wages

This credit only applies to federal income tax on wages.

It doesn’t apply to state income taxes, or unemployment, or social security or medicare. You still have to pay all of those taxes.

It also doesn’t apply to any income you receive that is not considered wages. Wages being defined as: “Salaries, professional fees, and other compensations received for personal services you preformed in a foreign country.”

For example: if you’re a freelance writer, developer or designer, your clients’ payments are wages. And selling products, interest from a bank accounts, dividends or distributions from your company are NOT considered wages.

Only money given to you as a salary, or in return for a service, is eligible to be excluded from income tax.

Other Limits

The maximum amount you can exclude in 2010 is $91,500.

You may also apply for a housing deduction. Meaning that in addition to the tax credit, you could receive a deduction for money spent on things like rent and utilities.

Any money you receive from the US government is NOT eligible for this credit.

Comments

Hey J- Read the article carefully and you'll realize your answers. And note that I say very specifically "This article doesn’t discuss whether you need to pay taxes where you are currently living or traveling to." You'll have to find that answer elsewhere.

So how about this situation. What if all my clients are in the US, and I want to live in the UK and EU for most of the year, or over 6 months a year, but feasibly rotate 3/6/3 between EU/UK/EU in a 365 day period. Where do I pay taxes then, and will these EU countries or UK even allow me to do this? Basically, I don't have any reason for staying put in the US. I don't mind paying taxes, but, it would seem odd to pay double taxes to 2 countries you know?

Hi Tracy, Based on my research, you do need to file taxes in the US, but you should be eligible to have almost all of your taxes returned. See form 2555 for the full details. I don't know the rules for Canadian citizen, but it makes sense that if you live there full time that you would need to file and pay taxes. But as I said, you should not have to pay in both countries.

HiMy husband is a retired US citizen. We live in Canada. His earnings are pension income from his US employer. He has established permanent residency in Canada and we just filed our first Canadian Income tax for him. My husband has no Canadian income however we are paying taxes to the US government and we were supposed to be paying to the Canadian as well. Needless to say we have a VERY large tax bill. Is this right?

Hey Mackenzie, Don't stress. Just file the returns as soon as you can and explain that you didn't know you were required to file. It's a common mistake, and one that I doubt they will hold against you, especially since you probably don't owe any back taxes. The instructions for form 2555 will give you some info, but might save you some hassle to call a tax professional and have them point you to the right forms. Good luck with the visa process!

AHHH! I really wish I had seen this forum before. I honestly had no idea that one would be responsible for filing taxes if they were out of the country. Here's my scenario: I lived in Argentina for 18 months. I was making pesos and most of my work was freelance (teaching English). Now that I've been back in the US for 6 months I haven't even thought about it except when I recently found out that I'll need to submit my last three tax returns to the government for a VISA petition for my boyfriend. Does anyone have any experience with filing a return AFTER they've gone back to the US? I no longer have any documentation of my earnings. I can just provide an estimate of the dollars I earned while I was away (nowhere near the $91,000 mark). Honestly I doubt I'd owe anything since I made so little...but I'm really nervous now that I know the IRS may hold this against me :( Any advice is welcome.

Hi Raven, I have no idea. I've never owned a house, much less tried to sell one. Also, you should look into the laws about living in Canada so long and not becoming a resident. It is likely that you will be liable for Canadian taxes. You don't want to start your finances fresh by owing the Canadian government (or any government) back taxes.

THANK YOU Jessica!!! We are not gonna be residents in Vancouver we intend to just stay there for a couple of yrs. I also would like to ask if short selling our house here in WA (currently we've lost around 60K in the value) is beneficiary?? Or get it foreclosed?? We've filed debt settlement last 2010-2011. I wanted us to start our finances fresh and save as much as we can on our return to WA to purchase a house with huge down payment with us. I know this is outside your article but I would like to hear ur opinion anyway... :)

Hi Raven, First, I highly recommend you seek out a tax professional for their opinion. Likely paying for an hour of their time will save you lots of money in ways that I can't even imagine.

To answer your questions to the best of my knowledge: If you become a resident of Canada, and pay tax there, and intend to stay there for an extended period of time, then you meet the bonafide residence test and will not need to pay US income taxes. If you do not intend to stay there, or become Canadian residents, (note, I don't know the laws in canada around non-residents paying taxes) then you need to remain outside the US for 330 days of the year. If you return home for business or pleasure for more than 30 days, then you no longer meet the requirements and will be required to pay income tax.

I have no idea if renting makes any difference in your taxes. I recommend you look up the IRS tax Form 2555 and it's instructions. This will tell you the details of this process. Alternately, go talk to an accountant :)

hi! my husband and i (both US citizens) contemplating to move in vancouver, we're in WA state. he work for a company in Long Beach, CA but telecommuting here in WA. he is not earning more than $91,500. from ur article as i understood, we're not gonna be paying the federal income tax. :) now, he needs to fly to Long Beach/Seattle/Oregon about 2-3 times a year for a conference meetings and maybe visit family in Cali does that make us fail the tests if we make the move?? and we're planning to do it in january to get the taxed year schedule, is that a good plan?? if we are going to rent over there, how is that helpful in filing taxes?? does that mean we get a refund then??

Hi Martin, So, I thought you question was easy, and just as I was about to respond, and I thought I would double check a few things. Well, I think, but am still not 100% positive, that you will be required to pay 30% of your wages in tax. Read this form for the info in detail: http://www.irs.gov/pub/irs-pdf/iw8ben.pdf

However, what is not clear to me, is if this form is for "non-resident aliens" that are living within the US or if it includes all foreign persons regardless of where they live. You can try the website, www.justanswer.com for good tax advice, usually for only a few dollars. I have used them before with great success. I'm sorry I'm not more help. (And sorry my country has such convoluted tax laws!) Good luck!-Jessica

Hi Jessie, Im a foreign, non-resident (im argentinean and live in argentina with my family) but i do work for a US company. They wire my salary/commissions every month to a bank outside the US. Again, im not a us citizen, dont have a green card, not a residency and live ouside the US all year long. Do I have to pay taxes in the US? looks like my company its confused about it, made me fill a W8BEN and now want to hold 30% of my salary...please help.

Hi Sandy, I think (and you should verify this with an accountant), that you will be required to pay income tax on items sold internationally, this is after all part of your business profit. If I do graphic design for someone in the UK, I still have to pay US income tax. Only when I leave the US can I be exempt. You probably can avoid charging your customers sales tax on the items, however they may be subject to import/export and duty fees.

You will not need to pay income tax in the countries when products or sold, unless you decide to live there. You may be required to pay sales tax (VAT, duty or import/export tax) on these item though. EBay has a lot of resources on how this works.

I was looking at building an e-commerce company. I am a US resident and will continue to live and work in the US, but with e-commerce, I could have sales anywhere in the world. would I need to pay income tax to the US for products sold in other countries? What about income tax to the countries where the products are sold? Thanks.

Hi Joe, Good question. The answer is two fold. If you move to Canada/Ecuador you must still FILE your taxes in the US (I am assuming you are a US citizen). You do not have to pay income tax on the money you earn assuming you stay outside of the states for 330 days in the year. You do still owe social security and medicare. However, if you file for residency in Canada or Ecuador (I assume you have to in order to stay more than a few months), then you may be required to pay taxes in these countries as well. Some countries only require you to pay tax if the money originates in the same country you are living, but others require all permanent residents to pay tax regardless of the location of their employer. I hope that answers your question.

I work virtually (i.e. from home) for a US based company. My company's home office is in the US. If I were to move to Canada or Ecuador for 1 or 2 years (taking my family with me, rent out my home in FL); where do I pay taxes? In the US? Ecuador/Canada? Would I fall into the category where I could exclude $91,500?